Essential Issues for LLCs and Other Limited Liability Entities Fiduciary Duties of Managers and Members Timothy W. Snider twsnider@stoel.com (503) 294-9557 Overview of Fiduciary Duties in LLCs Statutory Basis for Fiduciary Duties ORS 63.155 Existence of Duties Turns on Whether Member- Managed or Manager-Managed LLC Duties of Care, Loyalty, and Good Faith and Fair Dealing No Case Law in Oregon on LLC Fiduciary Duties Look to Corporate Law and Partnership Law as Analogy
Member-Managed Managed v. Manager-ManagedManaged Member-Managed Managed LLC: All Members Owe Fiduciary Duties to Other Members and LLC Manager-Managed LLC: Only Manager Owes Fiduciary Duties to Members and LLC Exception: Member in Manager-Managed LLC May Owe Fiduciary Duties To the Extent Member Exercises Managerial Authority ORS 63.155(9)(c) Duty of Loyalty Generally Forbids Manager/Member from Engaging in Conduct Forbids Manager/Member from Engaging in Conduct Furthering Private Interests at Expense of LLC Business Judgment Rule Inapplicable to Conflict or Self-Dealing Transactions Entire Fairness Standard of Review
Duty of Loyalty ORS 63.155(2) To Account and Hold for the LLC Any Property, Profit or Benefit Derived by the Member in Conducting Business of LLC Corporate Opportunity Doctrine Refrain From Dealing Adverse to LLC Conflicted Transactions Refrain from Competing with LLC Exceptions ORS 63.155(5)-(6) Duty of Care Generally [Member/Manager must] use that amount of care which [ g ] ordinarily careful or prudent men would use in similar circumstances and consider all material information reasonably available in making business decisions. Graham v. Allis-Chalmers Mfg. Co., 188 A.2d 125, 130 (Del. 1963). Business Judgment Rule Applies If Challenged Decision Was Product of Deliberate, Rational Process In re Caremark Derivative Litig., 698 A.2d 959 (Del. Ch. 1996). Violation of Duty of Care if Sustained or Systematic Failure of a Director to Exercise Reasonable Oversight Gross Negligence
Duty of Care ORS 63.155(3) Gross Negligence Caremark Standard Reckless Conduct Intentional Misconduct Knowing Violation of the Law Duty of Good Faith and Fair Dealing Generally Purpose: To Enforce the Reasonable Expectations of the Parties When Situations Arise That Are Not Expressly Contemplated in the Contract Fuzzy in Business Entity Context The good faith required of a corporate fiduciary includes not simply the duties of care and loyalty, in the narrow sense... but all actions required by a true faithfulness and devotion to the interests of the corporation and its shareholders. In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 755 (Del. Ch. 2005). Define Good Faith by Defining Bad Faith Action for Purpose Other than Genuine Attempt to Benefit Corporation Catch-All Provision
Duty of Good Faith and Fair Dealing ORS 63.155(5) Member/Manager shall discharge duties to the LLC and its members under the statute and operating agreement consistent with the obligation of good faith and fair dealing. Actions for Breach of Fiduciary Duty Derivative Proceedings ORS 63 801 Derivative Proceedings ORS 63.801 Standing Requirement Member When Transaction Complained of Occurred Demand Requirement No Dismissal or Settlement Without Court Approval
Fiduciary Duties Under Other States LLC Statutes Delaware No Codification of Fiduciary Duties Delaware Courts Have Found Duties Implied by 6 Del. Code Sec. 18-1101(d) and (e). Case Law in Delaware Finds Manager or Members With Control Owe Fiduciary Duties of Loyalty and Care Fiduciary Duties Under Other States LLC Statutes Washington Applies to All Members and Managers Unless Agreed Otherwise Duty of Care Gross Negligence, Intentional Misconduct, Knowing Violation of Law. RCW 25.15.155(1) Duty of Loyalty RCW 25.15.155(2) No Codification of Duty of Good Faith and Fair Dealing
Fiduciary Duties Under Other States LLC Statutes California The fiduciary duties a manager owes to the limited liability company and to its members are those of a partner to a partnership and to the partners of the partnership. Cal. Corp. Code Sec. 17153 Partners Owe Duties of Loyalty and Care to Each Other and Partnership. Cal Corp. Code Sec. 16404 If Member-Managed, Managed Each Member Owes Fiduciary Duties of a Partner in a Partnership. Cal. Corp. Code Sec. 17150 Varying Fiduciary Duties By Agreement Oregon Oregon Law Very Restrictive ORS 63 155(10) Oregon Law Very Restrictive ORS 63.155(10) May Not Eliminate Duty of Loyalty but May Identify Specific Types of Activities That Do Not Violate Duty ORS 63.155(10)(a)(A) May Set Forth Procedures for Ratification of Conflict Transactions ORS 63.155(10)(a)(B) M N t U bl R d D t f C May Not Unreasonably Reduce Duty of Care May Not Eliminate Good Faith and Fair Dealing Duty But Agree to Standards
Varying Fiduciary Duties by Agreement Delaware Maximum Flexibility It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. 6 Del. Code Sec. 18-1101 Permits parties in LLC agreement to eliminate all fiduciary duties except a bad faith violation of the implied contractual covenant of good faith and fair dealing. Common to Recommend Forming LLC in Delaware Due to Flexibility Varying Fiduciary Duties by Agreement Washington Freedom of Contract Principles Freedom of Contract Principles Maximum Flexibility It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements. RCW 25.15.800 Purports to Permit Parties to Eliminate All Fiduciary Duties by Agreement. RCW 25.15.155 Other Provisions in Washington LLC Statute Are Not Desirable E.g., No Conversion Rights
Questions? Essential Issues for LLCs and Other Limited Liability Entities Fiduciary Duties of Managers and Members Timothy W. Snider twsnider@stoel.com (503) 294-9557